Study: New Regulations Could Lead to Rate Hikes

InsideINdianaBusiness.com Report

Researchers at Purdue University suggest new federal clean air regulations could lead to a 14 percent increase in Indiana electricity rates by 2020. The analysis, prepared for the Indiana Utility Regulatory Commission, suggests the higher rates would be related to the need to upgrade coal-fired power plants.

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WEST LAFAYETTE, Ind. - New federal clean air regulations are projected to raise Indiana electricity rates about 14 percent by 2020 because of needed upgrades to coal-fired power plants, according to an analysis prepared for the Indiana Utility Regulatory Commission.

"Due to the federal regulatory focus on emissions from coal-fired generators, Indiana is expected to experience larger price increases than projected on a regional or national level," said Douglas Gotham, director of the State Utility Forecasting Group, a state-funded panel of researchers based at Purdue University.

In an earlier report presented on Sept. 21 to the Indiana General Assembly's Regulatory Flexibility Committee, he projected a 20 percent increase over the next six years. That projection was independent of the new environmental rules and driven by several other factors including costs associated with ongoing new plant construction and modernization to extend the operational lifetime of existing plants. When the 20 percent increase projection is added to this new report's 14 percent projected increase, Indiana rates could rise by 34 percent by 2020, in addition to the general inflation rate.

About 85 percent of the electricity used in Indiana is generated by coal-fired power plants, compared with about 45 percent nationwide. As of 2009, Indiana ranked fourth in the United States in the total amount of nitrogen oxides and sulfur dioxide emitted annually.

"Our analysis focuses on the impacts of the regulations on the electric energy sector of the economy and does not address the potential health and environmental benefits of reduced emissions," Gotham said. "To put our projections into perspective, the higher rates would still be lower than the inflation-adjusted electricity prices of the mid-1980s, when Indiana had an overabundance of generating capacity. In recent years, Indiana has enjoyed an advantage over other states because of its relatively low electricity prices. Essentially, what we see in our analysis is a shrinking of that advantage, but our rates would still be lower than the national average."

The new report was prepared by Gotham; Paul Preckel, a Purdue professor of agricultural economics; and analysts Marco Velastegui, David Nderitu and Tim Phillips. Analysts used a system of sophisticated mathematical models to predict the effects of new regulations, which are pending the resolution of legal challenges.

The rules from the U.S. Environmental Protection Agency include the Cross-State Air Pollution Rule, finalized in July 2011 but presently under a court-ordered stay pending appeal to reduce emissions of sulfur dioxide and nitrogen oxide; the Mercury and Air Toxics Standards, finalized in December; greenhouse gas regulations proposed for later this year; cooling-water intake structures regulations, expected to be finalized in July; and pending regulations regarding the disposal of coal ash.

"Since most of the modeled rules are not yet finalized, there is considerable uncertainty over the stringency and timing of the regulations," Gotham said. "If the final rules are more or less strict, their impact on prices would change accordingly."

As modeled, the regulations are expected to result in the closure of 19 generating units at six stations, primarily in southern Indiana.

"We looked at upgrades required for plants to be compliant with all the rules," Gotham said. "If the cost of upgrades is expected to be more than the cost of a new plant, we modeled it as being retired. These tend to be the smallest, oldest and least-efficient plants, so it doesn't amount to that much electricity in terms of the state's total generating capacity. For example, one large utility company has a single facility with five units that have more capacity than those 19 units do combined."

Closing 19 units would reduce overall capacity by 2,280 megawatts compared to total capacity in the state of about 24,000 megawatts. The analysis does not address the impact on jobs.

Analysts project the state will need an additional 2,960 megawatts of power by 2020 and 4,380 megawatts by 2025.

"Required resources could be met through conservation measures, purchases from other power generators or other utilities, construction of new facilities or some combination of all of these," Gotham said. "The best method for meeting resource requirements may vary from one utility to another."

A copy of the report is available on the State Utility Forecasting Group's website at http://www.purdue.edu/dp/energy/SUFG/

The forecasting group does not make recommendations. It conducts studies in accordance with a state law enacted in 1985 to provide the state regulatory commission with an impartial projection of electricity consumption and peak demand. That information is used to determine whether the need exists for additional power plants.

The forecasting group is housed within Purdue's Energy Center, which is part of the university's Discovery Park.